You have decided to lease a vehicle through your business. You have heard that there are some significant benefits to leasing vehicles through your business, which is why so many large and small businesses engage in the practice. Even if your business does not need a fleet a vehicles, the desire to drive a new automobile to conduct business is a strong incentive to acquire a new car and deduct related expenses to lower your business’ tax burdens.
However, there are some associated burdens that business owners should consider. This short article takes you through some pros and cons and endeavors to provide you with some insights that you should consider with your tax professionals. Assuming that your business qualifies for the automobile lease (credit history and proof of income, tax returns, etc.), your business still needs to demonstrate the business use of the vehicle to the IRS in order to substantiate the businesses eligibility for tax deductions. The IRS has provided substantial guidance on the matter. There are also IRS Publications on vehicle usage, mileage, limits on deductions, and depreciation.
Why leasing may be better than financing through your company
Aside from a lower down payment, and lower monthly installments, there are tax benefits to leasing as opposed to financing a vehicle through your business. First, lease payments are fully deductible as business expenses if the vehicle is 100% used for business purposes. Owning a business vehicle, on the other hand, only allows you to claim a deduction for depreciation of the vehicle.[1] You cannot deduct payments. Second, interest can be written off as it accrues; that is not the case if you finance the purchase. Lastly, the actual automobile expenses, such as maintenance, paid by the business are tax deductible business expenses.
How to qualify
Qualifying is simple: you must demonstrate that 50% or more of the vehicle’s usage (that is accrued mileage) relates to business purposes. These expenses are reported on your business tax returns (1040 Schedule C for sole proprietorships, 1065 for LLC and Partnership Tax Returns, Partnership Income on Schedule K-1, 1120-S for S-Corps).
Standard versus Itemized Deduction
Even with leases, you have the choice of taking the standard deductions each year of the vehicle lease or the actual (or itemized) costs of vehicle leasing. The method you choose at the outset is the method you must use on your business tax returns until your leased vehicle is returned to the dealership. Give considerable consideration to which deduction your business will take. The lease may qualify for a depreciation deduction, the first year of which may exceed the actual lease expenses.[2] However, you will not be able to write off the actual lease expenses.
What you can deduct
You can deduct all ordinary and reasonable costs for driving expenses related to the business usage of the vehicle. These typically include your lease payments, care lease sales tax, business portions of maintenance costs, gasoline, garage rental charges, parking and registration fees, insurance fees, licenses, oil, repairs, tires, and tolls.
What you cannot deduct
Standard mileage cannot be deducted if you are deducting lease payments and maintenance costs. The taxpayer has to elect one or the other. Discuss these options with your tax advisor in order to ascertain which offers the greatest tax benefits to your business. Any portion of the vehicle usage that is personal travel and commuting to work cannot be deducted as a business expense.
Conclusion
There are great tax benefits to leasing a vehicle and while the actual lease costs (including maintenance expenses) can be deducted, the standard 179 depreciation and mileage deduction might offer better benefits depending on how much business usage (mileage) you accrue on your vehicle. Regardless of which method you use, your company will have to substantiate the business usage of the vehicle to the IRS. Also, be aware that the IRS may limit the lease expenses for high-value leases (usually luxury vehicles) that can be deducted as business expenses.
Contact your tax professional with any questions before entering into a lease through your business. If you would like to learn more about VAdam Law and schedule a free consultation, visit our online scheduling portal or call 24 hours a day at (954) 451-0792.
[1] Depreciation of a vehicle is usually included in the monthly lease payments effectively allowing you to get a credit for the monthly installment and depreciation. There are some important limits on depreciation, such as “inclusion amount” for leasing luxury vehicles, which you should discuss with your tax advisors. See IRS Publication 463 (2021).
[2] IRS Publication 946 (2021) discusses how to depreciate property and the 179 deduction.